Forcing Good Governance

April 9, 2010

In a welcome move, SEBI has made it mandatory for mutual funds to disclose to investors how they exercise their voting rights as corporate shareholders—never mind that SEBI does not want to probe clear cases of fraud. Mutual funds are not only large enough to be heard on matters of governance, but have a fiduciary responsibility to their unit-holders, which they used to remember only occasionally. In a majority of cases, companies have entire departments whose job is to woo institutional investors and keep them happy and silent on controversial decisions. The smart companies ensure that many fund managers get to share the loot; even the more scrupulous ones often prefer to exit the stock rather than raise a voice.

Only occasionally, mutual funds will roar with displeasure. India's fund industry earned a lot of kudos at the famous conference call when Satyam tried to invest big money in Maytas, before Ramalinga Raju confessed to his gigantic fraud. One institutional investor referred to Satyam as a ‘third rate’ management. But, as the head of a boutique foreign research firm tells us, “that happens only when the fund's interests are badly jeopardised, without giving it the time to exit.”

Can activism be mandated? Can the responsibility to protest be mandated? And will the new rule force mutual funds to take a stand on management actions and decisions? Only time will tell. We believe that the reporting requirements will at least force investors to vote with their feet and exit the stock. This fear alone will be a useful check on most companies. And it protects retail investors too. — Sucheta Dalal